New Delhi: The government will stick to its borrowing target for 2009-10, finance ministry officials said on Tuesday, but analysts warned drought relief spending may strain government finances and force it to sell more bonds.
Finance secretary Ashok Chawla said the government would borrow a gross Rs1.23 trillion ($25.6 billion) in the second half of the year. That together with a conversion of market intervention bonds into regular debt, would keep total borrowing for the full year at Rs4.51 trillion, the target set by the government at the start of the year.
“There is no intention to increase that number at all,” he said.
Analysts said markets had expected the government to confirm the borrowing goal, but the worst dry spell in nearly four decades could increase the food subsidy bill in the second half of the year, possibly forcing the government to borrow more.
“The borrowing target will most likely be overshot. The budgeted revenue forecasts are very optimistic, that is the primary reason for this expectation,” said Ramya Suryanarayanan, economist at DBS in Singapore.
“There could also be some expenditure related to the monsoon deficit, and in case the borrowing is indeed increased, it would lead to a rise in bond yields,” she said.
The 10-year benchmark bond yield was at 7.13% by 0830 GMT, compared with 7.17% at the previous close.
The government has sold Rs2.95 trillion of bonds in April-September.
A formal meeting between central bank and finance ministry officials was scheduled for 3 p.m. (0930 GMT) to finalise the borrowing calendar for October-March.
Analysts said higher tax receipts, reflecting improving economic activity, and possible extra revenue from G3 mobile auction could still help keep the fiscal deficit within bounds, though uncertainty over farm sector performance was set to haunt the bond market.
“Rs1.23 trillion is perfectly in line with what markets had expected, but there is an upside risk to that, given that monsoon has created a lot of uncertainties,” said Rupa Rege Nitsure, chief economist at Bank of Baroda.
Concerns over extra supply coincide with a recent pick up in inflation, fuelling speculation that the central bank will be one of the first major monetary authorities to start withdrawing its policy stimulus, starting with a tightening of liquidity and reserve requirements for banks.
The benchmark 10-year yield has risen 188 basis points so far this year, reflecting both building expectations of a policy reversal and concerns over debt supply.
As the global downturn hit the country harder than expected last year, the Reserve Bank of India slashed reserve requirements, flooded markets with liquidity and cut its main lending rate by 425 basis points between October and April.
Spreads between the 1-year and 5-year swaps narrowed between end of May and mid-September, as the market factored in a rate hike early next year along with anticipated tightness in cash conditions, pushing up the one-year tenor swaps.
However, spreads are now widening following comments from RBI Governor Duvvuri Subbarao earlier this month that the central bank would not unwind its accommodative monetary policy before ensuring recovery.